Do Ports Know What’s Coming?

Do Ports Know What’s Coming?
Ports can use economic data to their advantage if they know where to look

By Meredith Martino

One of the hallmarks of the global financial crisis of 2008 is that so few people saw it coming. The indicators were not pointing toward doom. Yet, there were those who managed to look at the information underpinning the data and accurately predict what would happen to the U.S. economy.

Director Adam McKay’s film The Big Short, which focused on the collapse of the U.S. housing market and the ensuing devastation on Wall Street, and is based on the bestselling 2010 book by Michael Lewis, was nominated for Best Picture in this year’s Oscars competition. The film garnered wide critical and audience praise in late 2015 for making a complex global economic downward spiral accessible and understandable, which mirrors the response to Lewis’ original book.

At the heart of McKay’s film and Lewis’ book are characters who saw what was coming before everyone else did. By analyzing the right data in the right way, they felt confident making decisions that everyone else thought were off-base or even crazy. While a handful of savvy, convention-bucking investors figured out how to profit from their insight into the minutiae of complicated financial transactions, they also raised alarm bells and warning signals long before some of America’s oldest banks and financial services firms ultimately imploded in the way these investors predicted.

The ability of these individuals to know what was on the horizon before it actually happened continues to cast a long shadow as the global economy seems to be in doubt again. Chinese economic growth is slowing down, and oil prices are hitting some of their lowest prices in decades. Stocks throughout the United States, Asia and Europe have been on a (mostly downward-sloping) roller coaster in recent months, and financial analysts are expressing real concern about the state of the world economy.

Making sense of financial data and economic trends is a priority for any person or organization with long-term financial goals, be it a parent with a child to put through college or a U.S. big-three auto manufacturer making decisions about its manufacturing capacity. It is certainly a priority for ports. While the past few years have given rise to a cautious optimism that the Great Recession has finally loosened its grip on recovery efforts, recent events have shown that the world may be on the brink of something very worrisome.

Ports are trying to see what’s coming for them by sorting out which data is meaningful to their futures and making wise choices for the good of the communities and stakeholders they serve. While no port is looking for a Big Short-type yield on its investments in assets and infrastructure, all ports are trying to figure out which data to pay attention to and what should be guiding their decision-making.

Dr. Walter Kemmsies, Chief Economist at Moffatt & Nichol, oversees logistics infrastructure investment studies and produces global trade and economic forecasts. His focus is on freight movement infrastructure investment oriented toward international trade.

“Ports really need to pay attention to consumer spending,” said Kemmsies. “Cargoes need to be natural to the areas [ports]serve.”

Amidst a sea of data about energy prices, emerging countries’ economies and commodity prices, Kemmsies says that ports’ planning for the future should be most focused on what consumers – especially regional consumers and industries – are doing.

Matt Plezia, Director of Master Planning at the Port of Long Beach, echoed this sentiment. The Port of Long Beach, in partnership with the Port of Los Angeles, just completed a new long-term cargo forecast for the two San Pedro Bay ports. The forecast is a demand-type forecast that is based on macroeconomic trends and also looks at the two ports’ competitive position as a gateway.

“We think more about the two ports’ role in the U.S. economy,” Plezia said. “We respect our role in the global economy and we respect our international partners, but our role in the global economy isn’t as prominent [as our role in the local economy]in this forecast.”

Plezia emphasized that the two ports historically have focused on accommodating growth, which is driven by the U.S. demand for imports.

The port’s long term efforts “skip some of the economic indicators” that can be more near-term, Plezia said, and are driven “a lot by demographics and how demographics might drive U.S. [gross domestic product]and what that means for the demand for imports.”

“We try to predict domestically the demand for goods and where those things will come from,” he said.

While the two southern California ports are aware that there may be some shifting of sourcing patterns, specifically to southeast Asia or nearsourcing to Mexico or within the U.S., “the long-term expectation is that China and northeast Asia will remain more important” as the origin of import cargo.

For U.S. ports, Kemmsies pointed to U.S. employment numbers, which have been steadily rising in recent months. While much of the world focuses on what’s happening in China’s economy, Kemmsies urged perspective.

“Chinese incomes are still very low compared to U.S. wages,” he said. “A two percent increase in employment in the United States is more significant than a two percent decline in China’s employment.”

He also pointed out that the U.S. housing market has been steadily recovering.

However, the U.S. data is but one piece of a much larger economic puzzle.

Twenty years ago, emerging markets represented only about 12 percent of the world’s top twenty economies. In 2005, they were 25 percent. Now, approximately 34 percent of the world’s top twenty economies are from emerging markets. So the influence of larger, established markets like the United States has been diminished while the sway of markets such as China – still considered an emerging market – has grown.

“China is trying to slow growth, but it is still growing, not contracting,” Kemmsies said. “The Chinese government has been too aggressive in constraining growth and needs to pay attention to Chinese consumer sentiment.”

Plezia also cautioned U.S. ports from overreacting to the ups and downs of the Chinese economy.

“For us, China is a producer of products coming to the U.S.,” Plezia explained. “Any contraction of the Chinese economy would potentially impact our export trade with them but not necessarily our appetite for imports,” which are not only store-bound finished consumer products but also include raw materials and components used in U.S. manufacturing.

In addition to China, Kemmsies also urged ports to pay attention to what is happening in Russia and Saudi Arabia. With Russia, the concerns are less economic and more about the potential for war with other nations, which has the potential to disrupt global markets in a significant way.

Saudi Arabia, as the leader of OPEC, is still pushing OPEC into fighting to retain world oil share.

“They’re fighting technology,” Kemmsies said. “The whole mentality is not working.”

U.S. natural gas producers have improved technology and gotten a much better yield as a result. As OPEC nations lost share, they increased production to increase their share and attempt to bankrupt U.S. producers and scare them out of the global energy market, Kemmsies said.

“Oil prices right now are below cost,” Kemmsies pointed out. “The U.S. yield [on natural gas]is getting better all the time.”

And these energy prices are playing a huge role in other commodities. Both oil and natural gas are the feedstock for plastic pellets that are becoming the number one U.S. export.

“Steel and plastic are the two most important commodities in the modern economy,” Kemmsies said.

The U.S. market for energy is changing rapidly with the growth of the natural gas industry and also with the recent lifting of the U.S. oil export ban. In January, ConocoPhillips shipped crude through the Port of Corpus Christi, TX, to Germany. This was the first export of U.S. crude in more than 40 years.

“U.S. refineries are complex and can handle any kind of oil,” Kemmsies explained. “But other parts of the world have simple refineries, so the U.S. will begin exporting light, sweet oil and importing heavy oil.”

Accommodating this trend will be one element of port industry growth in coming years. Both Kemmsies and Plezia said ports need to be focused on capacity.

“Imports are doing better now but exports will improve,” Kemmsies said. He urged ports to maximize efficiency but also look to expand their footprint.

“In the near term, look to optimize dwell time. In the medium, address density. In the long term, focus on acreage,” he suggested.

Plezia’s team at the Port of Long Beach is doing just that by taking the long-term cargo forecast and using it in a long-term land use study.

“Terminal operators and carriers are thinking about this year and how to manage the peak,” he said. “We are thinking long-term. The land use study is an attempt to pull together our tools [including the cargo forecast]in a more holistic way.”